Various schemes have been introduced by the Government from time to time to encourage exports, viz, Special Economic Zones (SEZs), Export-oriented Units (EOUs), Software Technology Parks (STPs), Electronics Hardware Technology Parks (EHTPs), Biotechnology Parks (BTPs), etc.
Special Economic Zones
With a view to providing an internationally competitive environment for exports, the Government of India announced the SEZ Policy in April 2000. The objectives of the SEZ Policy include making available goods and services free of taxes and duties supported by integrated infrastructure for export production, expeditious and single-window approval mechanism and a package of incentives to attract foreign and domestic investments for promoting export-led growth.
Initially, SEZs in India functioned from 1 November 2000 to 9 February 2006 under the provisions of the Exim Policy/Foreign Trade Policy and fiscal incentives were made available through the provisions of relevant statutes. This system did not lend enough confidence to the investors to commit substantial investment for development of infrastructure and for the setting up of units for export of goods and services.
In order to provide a long-term and stable policy framework with minimum regulatory regime and to provide expeditious and single-window clearance mechanism in line with the international best business practices, a Central Act for Special Economic Zones was therefore found to be necessary. The Special Economic Zones Act, 2005 (SEZ Act) was enacted by the Government in 2005. Subsequently, the Special Economic Zones Rules, 2006 (SEZ Rules) were notified on 10 February 2006. Consequently, the SEZ Act came into operation w.e.f. 10 February 2006.
The SEZ Policy provides for simplified procedures and single-window clearance mechanism to deal with matters under Central/State enactments. For SEZ developers, there are different minimum-land requirements for different classes of SEZs. Every SEZ is divided into a processing area, within which only the SEZ units would come up, and the non-processing area, where the supporting infrastructure is to be created.
The salient features of the SEZ Policy are as follows:
- Simplified procedures for development, operation, and maintenance of the SEZs and for setting up units and conducting business in SEZs;
- Single-window clearance for setting up of SEZ;
- Single-window clearance for setting up units in SEZ;
- Single-window clearance on matters relating to Central as well as State Governments; and
- Simplified compliance procedures and documentation with an emphasis on self certification.
- The administrative set-up for functioning of SEZs is as under:
Board of Approval
Zonal Development Commissioner(s)
Unit Approval Committee(s)
- The Board of Approval (BoA) is the apex body and is headed by the Secretary, Department of Commerce, Ministry of Commerce and Industry, Government of India.
- The Unit Approval Committee (UAC) at the Zonal level deals with approval of units in the SEZs and other related issues.
- Each SEZ is headed by a Development Commissioner, who is ex officio chairperson of the UAC.
- Once an SEZ has been approved by the BOA and Central Government has notified the area of the SEZ, units are allowed to be set up in that SEZ. All the proposals for setting up of units in the SEZ are approved at the Zonal level by the UAC consisting of Development Commissioner, Customs Authorities and representatives of the State Government.
'Ease of Doing Business in India' initiative-Online Filing Facility for SEZ Proposals
Ministry of Commerce and Industry vide Notification No. D.12/25/2012-SEZ (Pt.) dated June 30, 20151 provides for digitization of application/ permissions by SEZ Units/Developers (Phase-II).
The Department of Commerce, Ministry of Commerce and Industry (MoCI), had announced the online filing of SEZ proposals vide Circular F. No. D.12/13/2008-SEZ, dated 21 October 2008. The following online services were being offered through the SEZ online link on the website http://www.sezindia.nic.in/:
- Filing of application (Form A) for setting up SEZ.
- Filing of other requests, viz, Application for authorised operations, addition of co-developer, application for conversion of in-principle approval to formal approval, application for validity extension of approvals, change in developing entity, change in sector, change in area/location, land details.
- Inbuilt e-mail box for each developer/co-developer to enable them to communicate with the Department.
- Online status of requests.
For filing of new applications, a physical copy of the complete application form after due signatures and authentication has to be submitted along with necessary enclosures.
In addition to the various applications digitized vide Department's aforesaid circular of 28 October, 2014, as a part of "Ease of Doing Business" initiative of Department of Commerce, the following additional transactions are identified by Department of Commerce as important applications made by SEZ units and Developers to Development Commissioner's office and Department of Commerce for various approvals/ intimations/ reporting.
Accordingly, with effect from 1 July 2015, online submission process for the following transactions has been made part of the SEZ Online System:
For SEZ Developers:
- Application for change of sector of SEZ (Form C3)
- Application for addition of land in notified SEZ (Form C4)
- Application for deletion of land in notified SEZ (Form C5)
- Application for De-notification of Notified SEZ (Form C6)
- Application for Form I for CST Exemption
- Application to lease out space for canteen facilities etc. in processing area
- Application for approval of list of materials and Services to carry on authorized operation in SEZ.
- Receipt & examination of the proposal by DC Office for setting up of SEZ, Processing the proposal along with site inspection report to DOC for consideration by Board of Approval (BoA).
For SEZ Units:
- Application for Issuance of Importer Exporter Code.
- Application for Issuance of Registration-Cum-Membership Certificate.
- Application for issuance of Form-I for CST Exemption
Further, no manual interface is to be allowed with effect from 1 July 2015 w.r.t. applications already identified and conveyed vide aforementioned circular of even number dated 28 October 2014 (Phase-I).
Minimum Investment/Net-Worth Criteria for setting up SE
The minimum investment or net-worth of the promoters, all group companies, and flagship companies, should be as under:
- Multi-Product SEZs - Minimum investment of Rs 1,000 crore (Rs 10 billion) or net-worth of Rs 250 crore (Rs 2.5 billion)
- Sector-specific SEZs - Minimum investment of Rs 250 crore (Rs 2.5 billion) or net-worth of Rs 50 crore (Rs 0.5 billion)
Process of setting up of SE
Setting up of a Special Economic Zone
Incentives to the SEZs
SEZs are deemed to be a foreign territory within the country. The SEZs are specifically treated as duty-free enclaves for the purposes of trade operations, duties and tariffs. SEZs enjoy a host of exemptions from income tax, customs duties, excise duties, central sales tax (CST), service tax and state levies.
Major incentives to SEZ developers
The major incentives and facilities available to SEZ Developers include:
(i) Direct taxes
- 100% income tax deduction, allowed to the Developer under s 80-IAB of the Income Tax Act for any consecutive 10 years out of the first 15 years from the date of notification of the SEZ.
- Exemption from minimum alternate tax (MAT) under s 115JB of the Income-tax Act. However, with effect from the assessment year 2012-2013, MAT at the rate of18.5% has been imposed on SEZ Developers.
- Exemption from dividend distribution tax (DDT) under s 115-O of the Income-tax Act to the SEZ Developers. However, with effect from 1 June 2011, DDT has been imposed at the rate of 15% on the dividend distributed by the SEZ Developers.
(ii) Indirect Taxes
- Duty-free import/domestic procurement of goods for development, operation and maintenance of SEZs
- Exemption from Central Sales Tax (CST)
- Exemption from Service Tax
(iii) FEMA/ FDI/ECB
- 100% Foreign Direct Investment permitted for setting up of SEZ with approval of the BOA.
- SEZ developers can avail of ECBs for providing infrastructure facilities within SEZ. For ("infrastructure sector", please refer para I(A)(v)(a) of the RBI Master Circular No. 12/ 2015-16 dated July 1, 2015).
- Full freedom in the allocation of space and built-up area to approved SEZ units on commercial basis.
- Authorisation to provide utilities and maintenance services, viz, water, electricity, security, restaurants and recreation centers on a commercial basis.
- Generation, transmission and distribution of power in SEZ.
Major incentives to SEZ units
The major incentives and facilities available to SEZ Units include:
(i) Direct taxes
15 years tax holiday in a phased manner, subject to certain conditions. 100% income tax exemption under s 10AA of the Income Tax Act, 1961 for the first 5 years, 50% for the next 5 years and thereafter 50% of the ploughed back export profits for the next 5 years. Exemption from minimum alternate tax (MAT) under s 115JB of the Income Tax Act was earlier available to the SEZ Units. However, with effect from the assessment year 2012-2013, MAT at the rate 18.5% has been imposed on SEZ units.
(ii) Indirect taxes
- Duty-free import/procurement from domestic sources for all their requirement of capital goods, raw materials, office equipment, DG sets, etc, for implementation of their project in the SEZ, without any license
- Exemption from CST
- Exemption/refund from Service Tax
(iii) FEMA/FDI related
- 100% FDI allowed through automatic route for all manufacturing
activities in the Special Economic Zone, except for the following
- Arms and ammunition, explosive and allied items of defence equipment, defence aircraft and warship,
- Automatic substances,
- Narcotics and psychotropic substances and hazardous chemicals,
- Distillation and brewing of alcoholic drinks, and
- Cigarettes/cigars and manufactured tobacco substitutes.
- Sectoral norms, as notified by the Government, applies to foreign investment in services. The cases not covered by automatic route to be considered and approved by the BOA.
- Units in SEZs are permitted to issue equity shares to non-residents against import of capital goods subject to valuation done by a Committee consisting of Development Commissioner and appropriate Customs officials.
- Units in Special Economic Zones (SEZs) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area (DTA).
- The period of realisation and repatriation of export proceeds shall be nine months from the date of export for SEZ units.2
- SEZ unit may open, hold and maintain a Foreign Currency Account with an AD Category – I bank in India subject to conditions stipulated in Regulation 6(A) of Notification No. FEMA 10/2000-RB dated May 3, 2000 and as amended from time to time.
- SEZ Units are permitted to undertake job work abroad and export
goods from that country itself subject to the conditions that:
- Processing/manufacturing charges are suitably loaded in the export price and are borne by the ultimate buyer.
- The exporter has made satisfactory arrangements for realization of full export proceeds subject to the usual EDF procedure.
AD Category – I banks may permit units in DTAs to purchase foreign exchange for making payment for goods supplied to them by units in SEZs.
- Export of Services by Special Economic Zones (SEZs) to DTA Unit: Authorised Dealer Banks are permitted to sell foreign exchange to a unit in the DTA for making payment in foreign exchange to a unit in the SEZ for the services rendered by it (ie SEZ Unit) to a DTA Unit.
- "Netting off" of export receivables against import payments by SEZ Units: AD Category-I banks may allow requests received from exporters for "netting off" of export receivables against import payments for SEZ Units subject to the condition that the "netting off" of export receivables against import payments is in respect of the same Indian entity and the overseas buyer/supplier (bilateral netting) and the netting may be done as on the date of balance sheet of the unit in SEZ.
- Enhanced limit of Rs 24,000,000 (Indian Rupees Twenty-four million) per annum allowed as managerial remuneration under the Companies Act, 2013.
Obligations of SEZ Units
- To achieve positive Net Foreign Exchange (NFE), in accordance with the formula provided under r 53 of SEZ Rules, 2006.
- To execute Bond-cum-Legal Undertaking and submit to the Development Commissioner in the prescribed Form-H under SEZ Rules, 2006.
- To submit Annual Performance Report to the Development Commissioner, in the prescribed Form-I under SEZ Rules, 2006.
- To abide by local laws, rules, regulations or bye-laws with regard to the area planning, sewerage disposal, pollution control and the like.
- To comply with Industrial and Labour Laws, as are applicable locally. It may be noted that the labour laws will apply to all the units inside the SEZs. However, the respective State Government may declare units within the SEZ as public utilities and may delegate the powers of Labour Commissioner to the Development Commissioner of the SEZs.
The SEZ scheme has generated tremendous response amongst investors, both in India and abroad. As on July 9, 2015, there were 416 SEZs which have been formally approved, out of which 330 SEZs have been notified. Further, out of 330 notified SEZs, 202 SEZs are were operational as on March 31, 2015. Nearly 3,900 units/ companies have set up their operations in these operational SEZs by making cumulative investment of Rs 2,88,477 crore. During the financial year 2013-2014, the exports from the operational SEZs stood at Rs 4,94,077 crore, which constituted nearly 30% of India's total exports.
The facts suggest that the SEZ scheme has generated a large flow of foreign and domestic investment in the development of SEZs.
The export-oriented unit (EOU) Scheme was introduced in 1980 and is covered under Chapter 6 of the Foreign Trade Policy. Establishment of units and their performance is monitored by the jurisdictional Development Commissioner under the Foreign Trade Policy provisions.
The purpose of the scheme was to boost exports by creating additional production capacity. Under this scheme, units undertaking to export their entire production of goods are allowed to be set up as an EOU. These units may be engaged in manufacturing, services, development of software, trading, repairing, remaking, reconditioning, re-engineering including making of gold/silver/platinum jewellery and articles thereof, agriculture including agro-processing, aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisci-culture, viticulture, poultry, sericulture and granites. EOUs can export all products except prohibited items of exports in ITC (HS) without payment of duty. However, permissions required for import under other laws shall be applicable.
A minimum investment of Rs 10 million in plant and machinery is required before commencement of commercial production in an EOU. Applications for setting up of units under EOU scheme, other than proposals for setting up of units in the services sector (except R&D, software and IT-enabled services or any other service activity, as may be delegated by the BOA), is approved or rejected by the Unit Approval Committee.
EOUs may import, without payment of duty, all types of goods, including capital goods, as defined in the Policy, required by it for its activities or in connection therewith, provided they are not prohibited items of imports in the ITC (HS). The units are also permitted to import goods required for the approved activity, including capital goods, free of cost or on loan from clients.
EOU units are exempted from central excise duty in procurement of goods manufactured in India, procured from DTA and from customs duty on import of capital goods, raw materials, consumables, spares, etc. Such units are further entitled to reimbursement of CST paid on purchases.
Supplies from Domestic Tariff Area (DTA) to EOUs are considered deemed exports and Indian suppliers can claim benefits of deemed exports. In addition, foreign investment up to 100% is allowed, subject to sectoral norms.
Software technology parks
The Software Technology Parks (STP) Scheme is covered under Chapter 6 of the Foreign Trade Policy. The STP Scheme is a 100% export-oriented scheme for the development and export of computer software and services using data communication links or in the form of physical media including the export of professional services. The major attraction of this scheme is a single-point contact service to the STP units.
For implementing the STP scheme, the Ministry of Communications and Information Technology formed the Software Technology Park of India (STPI) in 1991. STPI is an autonomous body for the management and regulation of IT Parks or STPs in India. The main aim of STPI is to develop India into an IT giant and one of the leading generators and exporters of IT and software within the coming few years. STP scheme approvals are given under a single-window clearance mechanism.
An STP unit can be located in areas designated as STP complexes or at any place where EOUs can be set up. Such a unit is a duty-free custom bonded area and is entitled to refund of CST paid on purchases. STP units are allowed to import all types of goods (except prohibited goods, namely capital goods, raw materials, consumables, office equipment, etc) for the purpose of manufacture/production of export products and export thereof, without payment of duties. Units can export software through data communication channel or through physical transport.
For the STP units, the period of realisation and repatriation of export proceeds shall be nine months from the date of export.3
Further, foreign investment up to 100% is allowed, subject to sectoral norms.
Electronics hardware technology parks
The Electronics Hardware Technology Parks (EHTPs) Scheme is covered under Chapter 6 of the Foreign Trade Policy. The EHTP Scheme is administered by the Ministry of Communications and Information Technology. Under the EHTP Scheme, an EHTP can be set up by the Central Government, State Government, public or private sector undertaking or any combination of them.
An EHTP unit can be located in areas designated as EHTP complex or at any place where EOUs can be set up. Such a unit is a duty-free custom-bonded area and is entitled to refund of CST paid on purchases. EHTP units are allowed to import all types of goods (except prohibited goods, namely capital goods, raw materials, consumables, office equipment, etc) for the purpose of manufacture/production of export products and export thereof, without payment of duty. Units can export software through data communication channel or through physical transport.
For EHTP units, the period of realisation and repatriation of export proceeds shall be nine months from the date of export.4 Further, foreign investment up to 100% is allowed, subject to sectoral norms.
The Biotechnology Parks (BTPs) Scheme is covered under Chapter 6 of the Foreign Trade Policy. The BTP units can export all products, except prohibited items of exports in ITC (HS) without payment of duty. Units may import, without payment of duty, all types of goods, including capital goods, as defined in the Foreign Trade Policy, required by it for its activities or in connection therewith, provided they are not prohibited items of imports in the ITC (HS).
BTP units are entitled to refund of CST paid on purchases and exempted from payment of Central Excise Duty on goods manufactured in India procured from DTA.
For BTP units, the period of realisation and repatriation of export proceeds shall be nine months from the date of export.5
2 RBI Master Circular No.14/2015-16 dated July 1, 2015 on Export of Goods and Services (as updated on November 5, 2015).
3 RBI Master Circular No.14/2015-16 dated July 1, 2015 on Export of Goods and Services (as updated on November 5, 2015)
4 RBI Master Circular No.14/2015-16 dated July 1, 2015 on Export of Goods and Services (as updated on November 5, 2015)
5 RBI Master Circular No.14/2015-16 dated July 1, 2015 on Export of Goods and Services (as updated on November 5, 2015)
© 2015, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).
The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.